Demonetization: Arrival with a Bang

Liberalization has left the soils of democracy loose. Firmer grounds have arrived now.

India has one aspect in common: the need for a special reward for performing ‘duties’. The attribute is so common across the country that research studies have gone to the extent of proving manifestation of corruption at even rudimentary levels of public services, through experiments. Recognising expectations and ‘being prepared’ for ‘unprecedented financial expenses’ is a common feature, especially with essential public services.

Corruption is perhaps an idiosyncrasy of development. When reform arrives in ideas, responsibilities, and development, corruption arrives as a catalyst, and becomes the mainstay. At global standards, the largest percentage of corruption was cited in the government offices, in most cases, and sectors that are the most affected are Real Estate, Oil, Mining, and Education. Bigger the transactions, the larger the money in circulation, and more the incidence of tax avoidance. Coming in at 76th, in the list of the least corrupted nations of the world (of 175), and with outrages by several victims of corruption, there was much to be done about the encumbrance. India has been counted as one of the foremost economies in technology utilisation, and now it is time the economy shows the world what (good) use the latter can be put into.

Corruption serves as an impediment to economic development and policy implementation at various levels. In this sense, it can be seen as an inhibitor of social welfare as well. When public services do not reach the intended population, then there is distortion in execution of plans by the government. The outcome is a weak economic structure. Of course, corruption cannot, in totality, be an economic phenomenon alone. It has roots in various units, and creeps up into other components. That is the thing about corruption; it spreads like the fiery wings of a prey. And, when it does, it continues to fly, grow and create a mammoth gaping hole in the system. India’s case is precisely this: an estimated loss of USD 34,393 million due to illegal financial flows was reported in 2013. In the face of such profligate losses, market reforms come as a forlorn resort to contain them. The situation has dictated much more drastic measures to uphold dignity of responsibilities especially in the public services area. Market reforms as the aftermath of liberalization helped in conquering intense competition between monopolistic firms, and therefore reducing corruption. An evidence of this is the low rank in 1995, at the start of liberalization. However, with power vested in the hands of the elected few, and the ever-increasing imbalances in income, corruption grew rapidly in the years that followed. Market reforms were more of a cause than a cure. India has come a long way in proliferating simpler, safer modes of financial transactions (payments) for services; especially public services. Competitive remunerations and adequate facilities in the public sector services have not been satisfactory enough to arrest corruption at any level. Two cited reasons might be inflation and unmatchable income growth. An additional reason may be bourgeoning nouveau capital-intensive businesses that need financial support, but are impeded by numerous controls, licenses and legalities that undue waiting time. As one of the highest tax paying economy, India is also high on tax evasion, given the incidence of high income from corruption. This has left an affluent economy like India with but one choice: demonetization.

Removing conditions that give rise to corruption may sort of be a process of uprooting the phenomenon. Flushing our black money from the system may not be a one-night affair. It starts however, with the slowing down of liquidity in the market. Curbing notes of higher denomination and fixing lower withdrawal limits, as the next steps to voluntary disclosure, may be a bold step, but a much-needed, logical turning point. The most predictable outcome would be political upheaval, as the hoarders come rich. The most afflicted segment in the process may be new businesses, especially capital-intensive ones. It may take a while for the industry to get used to the new system, and to imbibe new processes that allow lesser physical exchange of currency, and inflation-control. While individuals and households may find ways to operate with lesser money-holdings, it may be an unescapable problem for new businesses for the time being.